Stock Idea - Bharat Bijlee

Recommendation: Hold

CMP = Rs 2,080

Key points:

• Bharat Bijlee Ltd. (BBL) revenues grew at a CAGR of 36.7% and net profit increased at a CAGR of 45.8% over FY2006-08. The transformer division of the company has reported first full year of operations for its enhanced capacity of 8,000MVA. The company is further increasing its transformer capacity to 11,000MVA. The new capacity is expected to be operational by July-September 2008.
• The motor business' revenue grew by 24.5% in FY2007. The outlook for the current year also looks promising. However, the demand from certain sectors, particularly sugar and textile machineries, is slackening. During FY2008 the company obtained orders worth Rs 629 crore compared with Rs 579 crore in the previous year. In the first two months of FY2009, the company received orders worth Rs 97 crore (vs Rs 67 crore in the same period of FY2008), taking the total outstanding orders to Rs 362 crore.
• The management has indicated that the revenue growth may decline in Q1FY2009 mainly due to the disruption of production at the current plant on account of the ongoing work at the site to develop a new capacity. The new capacity is likely to be commissioned by August 2008. Consequently, the Q1FY2009 results would remain subdued and might decline in the top line and profits. The management seems confident of covering some lost sales in the subsequent quarters.
• The commissioning of the new capacity and the subsequent expansion in the capacity would remain the key to growth of BBL for the next couple of years. In our view, the near-term performance of the company would remain subdued which would be a drag on the stock.
• At the current market price the stock is trading at 8.7x its FY2009E earnings and enterprise value/earnings before interest, depreciation, tax and amortisation of 3.3x.
• I would recommend a HOLD call on BBL for next at least 6 months.

Stock Idea - ICI India

Recommendation: Buy
CMP = Rs 534 (at the time of this recommendation)
Price target: Rs 622
Key points:

• ICI India's FY2008 results are not comparable with FY2007 results, as the company sold off its Advanced 2K refinished paint business in March 2007. The net sales stood at Rs 992.6 crore during FY2008, as against Rs 1,015.2 crore in FY2007. On a comparable basis, the net sales increased by 13.7% to Rs 951.2 crore on the back of a strong performance by the chemical business.
• The return on equity (RoE) and the return on capital employed (RoCE) stood at 8.8% and 13.2% respectively in FY2008, which are lower compared to the RoE of 12.4% and the RoCE of 15.6% in FY2007. The decline in the return ratios was primarily due to a lower other income, as there were lower returns on the average investments.
• ICI India's cash from operating activities stood at Rs 82.90 crore in FY2008 on account of a better working management. In terms of outlook, the management is positive. However, it cites that its paint business would be impacted by a clear slowdown in the user industries like auto and real estate.
• The margins are likely to be under pressure due to the surging crude oil prices coupled with the hike in the key input prices. However, the company has a huge pile of cash of Rs 700 crore, which it can use to generate organic or inorganic growth going forward.
• At the current market price, the stock is trading at 18.1x (net of cash on books) its FY2010E core earnings per share of Rs 17.4.
• I maintain a strong Buy recommendation with a price target of Rs 622.

Stock Idea - Ranbaxy Laboratories

Recommendation: Buy

CMP = Rs 543 (at the time of this recommendation)

Price target: Rs 575

Key points:

• There have been a lot of activities happening in Ranbaxy Laboratories (Ranbaxy) – for example, the proposed equity dilution and the cash infusion from the Daiichi Sankyo deal, the reset of the foreign currency convertible bonds at a lower price, the revalued fair value of first to file (FTF) opportunities after the Pfizer settlement and the revised exchange rate assumptions. Consequently, I have downgraded the earning estimates of the base business in CY2008 by 20.5% (largely to factor in the research expenses as new drug discovery research {NDDR de-merger} is called off now).
• On the other hand, I have upgraded base business earnings by 16.7% for CY2009. On a fully diluted equity base of 48.6 crore shares, new revised estimates would yield earnings of Rs 14 per share in CY2008 and Rs 23.5 per share in CY2009 for the base business (excluding FTFs).
• Ranbaxy's FTF opportunities are revalued to account for the recent out-of-court settlement with Pfizer on Lipitor and Caduet. I expect Ranbaxy to earn revenues and profits of $4.3 billion and $1.7 billion respectively from all the FTF opportunities and the out-of-court settlements announced so far. Using a discount rate of ~9%, these settlements and FTF opportunities yield an NPV of ~Rs 106 per share.
• I continue to maintain Buy recommendation on the stock despite the fact that the stock price is nearing our fair value price target, with a price target of Rs 575 over next 4-5 months.

Stock Idea - Tourism Finance Corporation of India

Recommendation: Buy

CMP = Rs 19.5 (at the time of this recommendation)

Price target: Rs 30

Key points:

• The net interest income of Tourism Finance Corporation of India (TFCI) declined by 27.0% yoy to Rs 11.2 crore in Q4FY2008, mainly due to a 15.6% drop in the interest income and an 11.0% increase in the interest expenses.
• Notably, the operating expenses of TFCI declined sharply by 30.3% yoy during the quarter, primarily due to a higher base in the year-ago quarter on account of an extraordinary payment of Rs 1.0 crore made towards the arrears of employee expenses. 
• In addition, there was a write-back of provisions (for bad and doubtful debt) of Rs 10.0 crore, as the same was no longer required. The significant write-back was the primary reason why the bottom line improved. Hence, the net profit for Q4FY2008 also increased by a strong 60.2% to Rs 15.3 crore. 
• At the end of the fiscal, the sanctions made by the company stood at Rs 333.8 crore, up 36.0%. The disbursals also registered an increase of 50.0% to Rs 180.36 crore. However, the high growth in the disbursals could not translate into growth of the loan book due to higher repayment of loans. 
• The loans increased by 6.0% to Rs 372.7 crore, breaking the previous five years' trend of declining growth. The gross NPA’s stood at Rs 61.0 crore on an asset base of over Rs 500 crore.
• During the quarter, TFCI raised Rs 63.8 crore through the preferential allotment of 1.32 crore equity shares of Rs 10 each for cash at a price of Rs 48 per share. The capital raising was aimed at enabling the company to finance its future growth.
• At the current market price of Rs 19.5, the stock trades at 8.2x its FY2009E adjusted EPS of Rs 2.4 and 0.6x its FY2009E book value of Rs 34.9.
• I maintain a Buy call on this stock with a price target of Rs 30.

Stock Idea - Orchid Chemicals & Pharmaceuticals

Recommendation: Buy

CMP = Rs 251 (at the time of this recommendation)

Price target: Rs 300

Key points:

• Orchid Chemicals' (Orchid) Q4FY2008 and FY2008 results are a mixed bag: Strong margin pressure along with higher than anticipated interest burden and forex translation losses dragged down the profitability of the company during Q4FY2008. 
• The US generic market continued to power Orchid's growth, with revenues growing by 55.9% to Rs 379.2 crore in Q4FY2008 and by 35.7% to Rs 1,238.9 crore in FY2008. The growth was driven by the consolidation of the market share in niche product opportunities like Cefepime injections, Cefdinir tablets, and Cefoxitin and Cefazolin injections.
• Orchid's operating profit margin (OPM) shrank by 730 basis points to 20.3% in Q4FY2008 and by 290 basis points to 27.8% in FY2008. The declining margin restricted the operating profit growth to 14.6% at Rs 77.1 crore in Q4FY2008 and to 23.2% at Rs 344.8 crore in FY2008.
• Orchid's debt level remains high at $220 million (excluding the foreign currency convertible bonds as reflected in the increase in the interest cost in Q4FY2008. Further, the capex cycle does not seem to be over yet, with the company planning capex of ~Rs 150 crore in FY2009 and of Rs 150-175 crore in FY2010.
• The management has stated its intention of reducing its debt level further in the coming years. Despite the strong growth drivers and a robust business model, I believe the above-mentioned concerns will remain as an overhang on the stock, until the company's financials clearly reflect the management's intentions.
• In view of these concerns, I maintain a cautious Buy recommendation on the stock with a price target of Rs 300.

Stock Idea - Television Eighteen (TV18) India

Recommendation: Buy

CMP = Rs 261 (at the time of this recommendation)

Price target: Rs 486

Key points:

• TV18 stock has witnessed a slide in the past month and I believe it has got to do more with market sentiment rather than any weakening of the company's fundamentals, though macro risks of an overall slowdown in business activity cannot be negated. I believe the following factors have led to a correction in the price of the stock:
• An overall correction in the stock market due to the dependence of CNBC and Awaaz for their advertising revenues on the financial services business a significant portion of which comes from market participants.
• A substantial portion of Web18's revenues comes from subscription-based portals such as moneycontrol.com, poweryourtrade.com and commoditiescontrol.com. A slowdown in stock market activity is perceived to directly affect the growth of these businesses.
• The growth of the relatively new business of Newswire18 depends to a large extent on the mood of stock market participants.
• The postponement of Web18's listing and the consequent unlocking of value for TV18's shareholders, which was perceived to be a trigger.
• However I am quite buoyant about TV18 and believe that it will shoot up like a phoenix. I would recommend a Buy call on this scrip with price target of Rs 486 over next 7-8 months.

Stock Idea - Marico

Recommendation: Buy

CMP = Rs 65 (at the time of this recommendation)

Price target: Rs 77

Key points:

• Consumer spending patterns in India are gradually changing due to factors like rising aspiration levels, increasing income levels, growing brand consciousness and easy availability of credit. Not only that, an average urban household is also becoming increasingly conscious of beauty and health, and aware of the benefits of personal care.
• Despite this, according to a survey carried out by AC Nielsen, 30% of Indians are willing to spend more on beauty products and treatments to enhance their appearances. To tap this enormous opportunity several retail and FMCG companies have entered or are planning to enter the Rs 25,000-crore health & beauty retail segment in India. The operating profit margin (OPM) in this segment lies in the 20-25% range.
• Marico is leveraging its strength in the beauty and wellness segment through Kaya, which is recognised as a pioneer in skin care and beauty services. Kaya, which currently has 56 skincare clinics in India and nine such clinics in the Middle-East, contributed around Rs 98.5 crore to Marico's total revenues during FY2008.  
• The growing urbanisation of Indian cities and acceptance of specialised products and services provides a good opportunity for Marico to strengthen its roots in the low penetrated health and beauty segment in India. We believe that going forward Kaya would be one of the growth drivers for the company. However, the profitability of the company as a whole would be under pressure in the near term on account of a steep increase in the prices of its key raw materials. 
• At the current market price of Rs 64.6, the stock trades at 20.9x and 16.7x its FY2009E and FY2010E EPS of Rs 3.1 and Rs 3.9 respectively.
• I maintain Buy recommendation on the stock with a price target of Rs 77.

Stock Idea - Axis Bank

Recommendation: Buy CMP = Rs 716 (at the time of recommendation) Price target: Rs 1,150 Key points: The financial year 2008 was a roller-coaster year for the banking industry, with the outlook very positive at the beginning of the fiscal but clouded by multiple macro-concerns in the second half of the fiscal. Amidst all this, Axis Bank churned out an impressive earnings growth on the back of an aggressive business growth and capital infusion. The retail banking operations of Axis Bank contribute about 20% to the bank's total income and only 8% to its bottom line, making it the least profitable segment. Wholesale banking is most lucrative business for the bank owing to its strong position in the loan syndication business. However, significant focus on strengthening the current account and savings account (CASA) should drive Axis Bank's profitability going forward. The restructuring of the corporate banking business has helped the segment achieve a strong growth (a 68.3% growth in corporate advances). A leadership position in the loan syndication business provides further impetus to the corporate banking business. The concentration of the bank's exposure to certain industries is a cause for concern with gems and jewelry forming 39.5% of the non-fund exposure, and non-banking finance companies & trading companies forming 13.6% of the fund based exposure. Also, a higher off-balance sheet exposure may require increased provisioning considering the Reserve Bank of India's tough stance and revised guidelines on the subject. The bank's management believes that the operating environment for banks would get tougher owing to further possible monetary tightening, marginal deterioration in credit quality and valuation losses due to the widening of spreads. At the current market price of Rs 716, the stock trades at 18.1x 2009E earnings per share, 8.6x 2009E pre-provisioning profit per share and 2.7x 2009E adjusted book value per share. I maintain a very strong Buy recommendation on the stock with a price target of Rs 1,150 over next 6-8 month time frame.

Stock Idea - Grasim Industries

Recommendation: Buy

CMP = Rs 2,192 (at the time of recommendation)

Price target: Rs 3,002

Key points:

• Grasim Industries (Grasim) has struck a deal with Welspun Power and Steel (Welspun) to sell its sponge iron business (Vikram Ispat) for a consideration of Rs 1,030 crore by way of a slump sale. The proceeds from the sale will be invested in the core businesses of cement and viscose staple fibre.
• The sponge iron division will be sold at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.4x FY2008 EBIDTA. Considering the poor performance of the sponge iron division in the past (low capacity utilisation and EBIDTA margin), we believe the sale would be value accretive for the shareholders of Grasim.
• At the current market price of Rs 2,192, the stock is trading at 8.8x its estimated FY2009E earnings per share (EPS).
• I maintain Buy recommendation on the stock with a price target of Rs 3,002 over next 6 months.

Stock Idea - Punj Lloyd

Recommendation: Buy

CMP = Rs 287 (at the time of recommendation)

Price target: Rs 532

Key points:

• Punj Lloyd Ltd's (PLL) headline numbers were broadly in line with our expectations. The revenues grew by 37.8% to Rs 2,346.7 crore. The process plant contributed 36.3% to the top line. Led by strong performance in the standalone entity, the consolidated operating profit margin (OPM) increased by 60 basis points to 10.6%. The operating profit grew from 45.7 crore to Rs 248.6 crore. The net profit grew by 32.4% to Rs 117.7 crore.
• The auditors have made qualification on a project being executed by the subsidiary Simon Carves, which may incur a potential loss of Rs 305.3 crore due to change in the scope of the work. However, the management has now highlighted that the company has already reached an agreement on the recovery of £15 million (~Rs 125 crore). The management has further maintained that it would be able to reach the breakeven in the project and is negotiating with the client for the same. The company plans to spend Rs 350-400 crore as capital expenditure over FY2009.
• The company continued to focus on its strategy of increasing its order ticket size. The current order of Rs 19,595.6 crore has an average execution period of 26 months. The company has a robust order backlog and provides high visibility to the future earnings of the company. Rs 709 crore worth of orders are legacy orders.
• At the current market price, the stock trades at 16.5x and 12.4x FY2009E.
• I maintain a strong Buy call on this stock with a price target of Rs 532 over next 607 months.

Stock Idea - Punjab National Bank

Recommendation: Buy

CMP = Rs 480 (at the time of this recommendation)

Price target: Rs 632

Key points:

• Punjab National Bank (PNB) reported an impressive growth of 128.8% yoy in its bottom line during Q4FY2008. The profit after tax (PAT) of Rs 543.8 crore was well above our expectation. The net interest income (NII) for the quarter stood at Rs 1,517.3 crore, up 12.7% yoy. After adjusting the year-ago NII for one-time gain (Cash Reserve Ratio income of Rs 56 crore), the NII growth comes at 17.6% yoy.
• The non-interest income registered a 9.8% decline yoy and reached Rs 537.2 crore. Notably, the operating expenses were down 21.8% yoy to Rs 827.7 that helped boost the bottom line. The decline in the operating expenses stemmed from a 33.3% decline in the staff expenses. The provisions and contingencies were down significantly by 72.6% yoy to Rs 167.7 crore. The decline was primarily due to improving asset quality.
• The advances registered a healthy growth of 23.7% yoy to Rs 1,19,502 crore, while the deposits were up 19% yoy to Rs 1,66,457 crore. The current account and saving account ratio stood at an impressive 43%. The asset quality improved further during the quarter on both absolute and relative basis. The gross non-performing asset (GNPA) in percent terms stood at 2.74%, significantly down from 3.45% a year ago, while the net non-performing asset in percent terms declined to 0.64% from 0.76% a year ago. The significant improvement in the asset quality has allayed concerns to a great extent.
• Capital adequacy ratio (CAR) as at the end of Q4FY2008 stood at a comfortable 12.96% based on Basel requirements, while based on Basel II the CAR was 13.46%.
• At the current market price of Rs 480, The stock trades at 6.4x 2009E earnings per share (EPS), 3.3x 2009E pre-provisioning profit per share and 1.2x 2009E book value per share.
• I maintain Buy recommendation on the stock with revised price target of Rs 632 over next 6 months.